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Sticky Stops: Units-Options & Adjustment Levels
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JimDean
Posted 7/25/2011 1:39 PM (#2618)
Subject: Stops: Units-Options & Adjustment Levels



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Click here for a discussion of Fixed Loss and Trailing Profit stops that have a big collection of snapshots which document the effects discussed in this thread.

Almost all the canned Nirvana stops have one or more parameters, and usually there is at least one parameter that is a "multiplier" to be used with whatever Units are selected.

The snapshot shows the Two Moving Average stop, which has three parameters that are all tied to the Units selection. Each of those parameters is an independent multiplier.

The Units are specified in a dropdown box: ATR (Average True Range), Percent (of the Close price), or Points (i.e. currency = Dollars in US exchanges). If you input Units as ATR or Percent, then the gap will be calculated at the start of the trade, based on the ATR or Percent of Close at the end of the Signal bar, which precedes the Entry bar.

Which should you use?

Many people feel that ATR is the best (ie most universal) to use for short-med term trading, since volatility is the name of the game in that arena, and ATR is a the most widely-accepted means of measuring price-action volatility.
On the other hand, if you're holding for longer periods (several months/years, with daily bars), then that's more of an "investment" approach, and Percent is usually considered to be a more useful set of units.
Finally, if you're more of a daytrading "scalper", and if you normally just work with a handful of symbols, you might prefer to use Points. Points can be "dangerous" to use for other types of trading, since both the price per share and/or the volatility vary widely from one stock in your Focus List to another, requiring that your Points inputs be changed with each new trade - which is something that is easy to forget.

Recommendation ... unless you're a scalper or investor, use ATR.

You can define the ATR periods (number of bars used for the average) in the parameter table for the stop - 14 is the most common default value, but values from 5 to 40 are not uncommon. Since the averaging method for the ATR is an infinite series (like an exponential MA, but slower), it's usually not beneficial to use numbers much larger than 40.


(Stop Units for Parameters.png)



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Attachments Stop Units for Parameters.png (324KB - 4 downloads)
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JimDean
Posted 7/25/2011 2:59 PM (#2619 - in reply to #2618)
Subject: Stops: Units-Options & Adjustment Levels



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Posts: 3925
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The second "generic" input area for nearly all Nirvana canned stops involves two "radio-button" groups. Sometimes just one of these groups will be active ... in that case, the labels and input buttons for the other group will be "grayed-out".

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The first group defines what "price-point reference level" should be used as the basis for the Stop calculation for the very first bar of the trade. That is, what is the "representative price" that the Stop should be scaled from. This is the price from which the initial "stop-gap-cushion" is subtracted for a Long trade, or added for a Short trade.

You have FOUR CHOICES for the price to be used for the Entry Stop Level reference, two from the Prior bar, and two from the Current Bar. The Prior Bar is the bar just before Entry, aka the "Signal" bar. This is the bar that the little red or green triangle appears next to, if you have that option activated in Chart Properties ... or that the signal-triangle is beneath, on the voteline. The Current Bar is the first bar which is considered as an Entry candidate.

Prior-Bar options: High\Low Price, or Close Price. The Close option is simple ... entry-bar stop calc's are referenced to the Close of the last complete bar before the trade begins. That's the price that the stop-gap-cushion is added to or subtracted from. If you select the High\Low Price option, then normally (there may be an exception - I have not checked them all yet), OT's canned stops use the LOW price as the reference for LONG trades, and the HIGH price for SHORT trades. This tends to push the stop further away from the price-action, than if you'd selected Close. The High\Low price is drawn from the last complete bar before the trade begins - NOT from the first bar of the trade.

Current-Bar options; Entry Price, or Open Price. The Open option is simple ... this is the first price-print of the day ... it is the ONLY one of the "standard" bar prices (OHLC) that never changes as the day progresses, so it's "safe" to use for modelling. The "Entry Price" is less well understood. This price depends on the TYPE OF ORDER associated with the trade. If your order type is MOO/BOO or MOC (EOD only), the Entry price will be the Open or Close of the Entry bar, respectively. If your order type is Market, then the Entry price will be the next "print" that is encountered after the order is fired to the broker (at the Hard Right Edge), and will be modeled as the Open of that bar for historical simulation. However, if your order type is Limit or Stop Market or Stop Limit, then the entry price will be modeled historically as whatever the threshold level is which was associated with the order (for a SL order, the L threshold is used) ... this matches what happens at the HRE (disregarding slippage effects).

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The second group of two buttons defines what price-point should be used for the ongoing calculations that affect the stop-level AFTER the entry bar (if any). Sometimes this is pair of inputs is inactive, as for a Fixed Loss Stop. However, most stops do adjust themselves as the trade progresses. To do this, they "watch" what's happening and respond accordingly. Some of these auto-adjust stops are very complex, and do not use this input-option. But some of the "base-package" Nirvana stops have an adjustment that relates fairly simply to the most recently COMPLETED price-bar. This input specifies whether the potentially-refined stop-gap-cushion should be applied to the Close of the most recent bar, or the High\Low extreme of that bar. As before, OT uses the Low for Longs, and the High for Shorts.

Calculation of the adjusted stop value, when this input is active, works in the same way as the calculation for the Entry stop, with one important exception. Almost all Stops (that IMHO are worth using) have a "ratchet" rule - the "new" stop level that's calculated based on the most-recent bars since entry is never allowed to drop for Longs, or rise for Shorts. That is, if your Long trade has a Stop price of $50 on some bar of the trade, then might be adjusted HIGHER than $50 on subsequent bars, but if the adjustment tries to push it below its highest value so far, that adjustment is ignored. So, a Long-ratcheted stop's price might be: 50,50,52,57,57 on successive bars ... but it will not be: 50,49, 52, 57, 56 ... or in any other pattern that "backtracks". For shorts, the opposite holds true: 50,50,48, 45, 45 is OK, but this is not: 50,51, 48, 45, 43.

Please note ... a Stop CAN be created that allows that "backtracking", but it's not considered good practice.

What's this all mean in practical terms, as the trade progresses? As mentioned earlier, choosing the Close option for adjustment will tend to keep the stop "tighter" to the main price action. This means that for stops based on SM orders, the trade will usually exit earlier, since the exit fires when an Extreme (H or L) price crosses the stop threshold. The "ratchet" rule (if it is coded into the stop) provides us a significant benefit ... the more-random and "wilder" swings of the Extreme prices from bar to bar are prevented from pushing the stop further away.

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In summary ... there is no "best" choice, or even a "generally advisable" one, for either of these inputs. The main thing to remember is that selecting "Close" or "Open" will tend to keep the stop closer to the price action than selecting "High\Low". You have to decide, for your strategy and symbol-set, which you consider to be more advantageous.

(Stop Adjustment Level Choices.png)



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Attachments Stop Adjustment Level Choices.png (105KB - 3 downloads)
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